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Tightrope walk

Tightrope walk
Highlights

Indian economy is sending conflicting signals these days. While the gross domestic product (GDP) has been on a downward spiral, hitting a three-year low of 5.7 per cent in April-June 2017 quarter, the retail inflation has reared its ugly head yet again, climbing to a five-month high of 3.36 per cent in August.

Indian economy is sending conflicting signals these days. While the gross domestic product (GDP) has been on a downward spiral, hitting a three-year low of 5.7 per cent in April-June 2017 quarter, the retail inflation has reared its ugly head yet again, climbing to a five-month high of 3.36 per cent in August.

It was at 2.36 per cent in July this year. Rupee looks to be on a weaker wicket now, partly due to the intervention of the Reserve Bank of India with an aim to infuse some positive sense into the ailing export landscape. On Monday, the currency crashed to a six-month low, settling above Rs 65 versus greenback. To cap it all, the Indian equity markets climbed by a significant 13 per cent in the last one year even as the economy began to falter.

These contradictory indicators will obviously put in a tight spot the RBI chief, Urjit Patel, and five of his colleagues on the Monetary Policy Committee (MPC) when they meet in Mumbai on October 4 to take a call on the course the country's monetary policy shall take in near-term.

As widely expected, the Patel team may want to opt for status quo on the interest rates because, to the apex bank's discomfort, inflationary pressures have come back to haunt. RBI has been an inflation warrior all along and it's no different under the stewardship of Patel, the reticent incumbent.

In the last bi-monthly monetary policy review in August, RBI went for a rate cut for the first time in 10 months. It reduced the repo rate by 25 basis points, thus bringing the key rate down to a near 7-year low of 6 per cent.

But RBI's status quo option may not go down well with the North Block at a time when the Modi government is seriously mulling over the ways and means to infuse life into the slowing economy. A Finance Ministry official already put the apex bank on notice when he recently said that there was a further scope for monetary easing as inflation remained under the medium-term target of 4 per cent.

As RBI intervened in forex markets and reined in the rupee rise apparently at the Centre's bidding, the mandarins in the government would naturally expect a similar gesture from the apex bank on the interest rates. But it's time they realised that mere depreciating rupee and lowering interest rates may not be of much help to the ailing economy which needs a major surgery.

The overexuberance exhibited by the Modi government in thrusting demonetisation on RBI and the country on the pretext of weeding out black money, had cost the economy dearly. That apart, the government has hurriedly brought in goods and services tax (GST) without proper implementation ecosystem in place.

So, the economy is currently reeling under the twin blows of note ban and GST. Against this backdrop, the government should allow RBI to function independently and take a measured decision instead of foisting a rate cut on it. But that seems a far cry now and RBI is in for a tightrope walk!

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